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spk01: Good day, ladies and gentlemen, and welcome to Universal Display Corporation's second quarter 2022 earnings conference call. My name is Sheri, and I will be your conference moderator for today's call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Darice Liu, Senior Director of Investor Relations. Please proceed.
spk00: Thank you, and good afternoon, everyone. Welcome to Universal Display's second quarter earnings conference call. Joining me on the call today are Steve Abramson, President and Chief Executive Officer, and Sid Rosenblatt, Executive Vice President and Chief Financial Officer. Before Steve begins, Let me remind you that today's call is a property of Universal Display. Any redistribution, retransmission, or rebroadcast of any portion of this call in any form without the express written consent of Universal Display is strictly prohibited. Further, this call is being webcast live and will be made available for a period of time on Universal Display's website. This call contains time-sensitive information that is accurate. only as of the date of the live webcast of this call, August 4, 2022. During this call, we may make forward-looking statements based on current expectations. These statements are subject to a number of significant risks and uncertainties, and our actual results may differ materially. These risks and uncertainties are discussed in the company's periodic reports filed with the SEC and should be referenced by anyone considering making any investments in the company's securities. Universal Display disclaims any obligation to update any of these statements. Now, I would like to turn the call over to Steve Abramson.
spk03: Thanks, Darius, and welcome to everyone on today's call. Before we delve into our second quarter results and the OLED industry, I want to take a moment to discuss the leadership transition that we announced this afternoon. Following an exceptionally impressive and remarkable 26 years with Universal Display Corporation, Sid will be retiring from the company at the end of this year. Under his leadership, Sid helped transform UDC from a three-person startup to a profitable world-class operation, played a critical role in establishing and fostering the robust corporate culture that makes UDC who we are, and helped steer our path of growth and success. On behalf of the board, the management team, and our colleagues at UDC, I would like to thank Sid for his extraordinary service, steadfast commitment, and immeasurable contributions to the company. On a personal note, I am grateful for the 46 years of friendship and close business collaborations. In 1976, when many of you were probably not yet born, Sid and I met at Temple Law School. In 1982, we both joined one of Sherwood's earlier startups called International Mobile Machines Corporation, or IMM, which helped invent digital cellular radio. In 1996, we again joined Sherwood to help revolutionize the electronic display industry with a relatively unknown technology called OLEDs, at a time when CRTs were still the mainstream display technology in the market. Fast forward to today, and UDC is a pioneer and a leader in the OLED ecosystem. We have strong customer partnerships, a lean and profitable operating model, and are continuously growing our portfolio of state-of-the-art technologies and materials, expanding our presence around the world, and fortifying our robust framework for growth, in all of which Sid has been instrumental. Don't worry, though. Sid is not leaving the UDC family. He will remain on the Board of Directors and continue to share his valuable insights and guidance. On behalf of the entire company, I would like to wish Sid a happy, healthy, and well-deserved retirement. We are excited to announce that Brian Millard has been appointed Chief Financial Officer effective September 6, 2022. Brian will be an excellent addition to the executive team to help spearhead UDC to new heights of opportunity and growth. Brian joined UDC with a wealth of experience across several industries. He has a strong background with more than 15 years of deep financial, operational, and strategic experience. He was most recently Senior Vice President of Finance and Corporate Controller at Emergent Biosolutions. His prior experience traversed large multinational corporations, including Hertz Global and Hilton Worldwide. Brian will help nurture and enhance UDC's collaborative culture of inventiveness, integrity, inclusion, and imagination that makes UDC a unique growth company. On behalf of the entire company, I welcome Brian to UDC. Now to our results. Our second quarter 2022 revenue was $136.6 million. Operating profit was $53.3 million. And net income was $41.5 million. or 87 cents per diluted share. Our second quarter started off with a solid note, but as we approached the summer, customers lowered their forecasts. Given the downward trend in forecast revisions and increasing macro uncertainty and volatility, we are revising our 2022 revenue forecast to approximately $600 million plus or minus $10 million. While near-term headwinds are expected to continue weighing on the economy, and impacting consumer spending, positive long-term momentum in our OLED pipeline continues. OLED industry roadmaps continue to expand, and as the evolution of the OLED market continues to advance, so are we. As a lean operating company with a strong balance sheet and no debt, we are well-positioned to continue investing in our long-term growth strategies. We are investing in our people, our technologies, our materials, and our infrastructure to reinforce our first mover advantage, expand our materials and technologies portfolio, and broaden our support to customers and the OLED industry. As we look out, we believe that 2024 is shaping up to be a pivotal year for the OLED industry and for us. From an industry perspective, a significant new wave of Gen 6 and Gen 8.5 OLED capacity plans are reportedly in the works as panel makers advance product roadmap plans for medium and large area OLED adoption. As OEM activity for OLED IT and OLED TV products continue to grow, there are recent reports that Samsung, LG Display, BOE, Tienma, China Star, and Visionox are all reviewing new investment plans. This new wave of capacity builds is expected to drive significant growth and momentum in the OLED industry and for us. In addition to capital investment plans, panel makers are working on technologies such as LTPO backplane and tandem OLED material structures to prepare for the OLED IT wave. At the same time, we are continuing to build upon and expand our core competencies. We are innovating, inventing, and introducing new OLED phosphorescent emissive materials with continuous improved performance to achieve our customer specifications, including next generation's reds, greens, yellows, and hosts. With respect to blue, we continue to make excellent progress in our ongoing development work for a commercial phosphorescent blue emissive system. We continue to believe that we are on track to meet preliminary target specs with our phosphorescent blue by year-end, which should enable the introduction of our all-phosphorescent RGB stack into the commercial market in 2024. We believe that the commercial introduction of our full-color emissive stack will unlock a vast array of opportunities for higher energy efficiency and higher performance across a broad range of OLED applications. Another important component to support growth and our customers is the development of groundbreaking technologies that solve significant industry challenges and help advance the OLED market. For decades, the OLED industry has sought a manufacturing process for side-by-side RGB OLED TVs to pattern the pixels across a Gen 8.5 plus mother glass. This is the industry challenge and opportunity that we are taking on with OVJP. We are steadily making progress with constructing the key subsystems of our alpha system design for our trailblazing manufacturing printing platform. In May, our Silicon Valley team printed our first Gen 4 panel using 10 OBJP print nozzles and our phosphorescent red emitter materials. While still a few years away, we believe that OBJP will pave the path for high-value manufacturing large area RGB OLED TV panels and develop into a multi-billion dollar market opportunity. These R&D programs bolster our global OLED intellectual property framework while increasing our value proposition in the ecosystem. These initiatives also reinforce our strategic priorities to widen our reach, expand our business, and drive profitable long-term growth. On that note, And for the last time in more than a decade of earnings conference calls, let me turn the call over to Sid.
spk07: Thank you, Steve. And again, thank you everyone for joining our call today. It has been my pleasure and privilege to serve as UDC's CFO since Sherwin, Steve, and I took the company public in 1996. This amazing 26-year journey has been filled with triumphs, challenges, unwavering determination as well as an unshakable belief in the future of OLEDs and the company. In 2011, we achieved profitability and UDC's earnings has reached new record levels ever since. It has been a distinct honor to help lead this wonderful company and to work alongside a team of phenomenal and dedicated people. I am humbled by and proud of all of UDC's accomplishments during my tenure and am confident that the future of the company is exceptionally bright. I look forward to working with Brian in these coming months. Now to our second quarter 2022 results. Revenues for the second quarter of 2022 was $136.6 million compared to first quarter $150.5 million and second quarter 2021's $129.7 million. Our total material sales were $71.9 million in the second quarter of 2022, compared to material sales of $86.7 million in the first quarter and $77.4 million in the second quarter of 2021. Green emitter sales in the second quarter of 2022, which include our yellow-green emitters, were $54.5 million. This compares to $66.4 million in the first quarter and $57.8 million in the second quarter of 2021. Red emitter sales in the second quarter of 2022 were $17.3 million. This compares to $20.2 million in the first quarter and $19.5 million in the second quarter of 2021. As we have discussed in the past, material buying patterns can vary quarter to quarter. Some of the contributing factors include COVID-19 issues, as well as consumer product demand cycles, capacity ramp schedules, production loading rates, device recipes, product mix, material ordering patterns, customer inventory levels, and customer production efficiency gains. Since a number of these factors are moving variables for our customers, they are also moving variables for us. Second quarter 2022, royalty and license fees were $60.3 million. This compares to $59.8 million in the first quarter and $48.2 million in the second quarter of 2021. Second quarter 2022, ADESIS revenues were $4.4 million. This compares to $4 million in the first quarter of 2022 and in the second quarter of 2021. Cost of sales for the second quarter of 2022 were $27.2 million, translating into overall gross margins of 80%. This compares to $33.2 million in gross margins of 78% in the first quarter and $28 million in gross margins of 78% in the second quarter of 2021. Cost of OLED material sales in the second quarter of 2022 were $25 million, translating into material gross margins of 65%. First quarter material gross margins were also 65%, and the comparable year over year's quarter material gross margins were 67%. For the year, as inflationary pressure persists, we estimate that our material gross margins will tend towards the low end of our guidance range of 65 to 70%. As we noted in the past, material gross margins can vary quarter to quarter. Second quarter 2022 operating expense, excluding cost of sales, was $56 million. This compares to $55.1 million in the first quarter and $51.8 million in the second quarter of 2021. For the year, we estimate that our operating expense of SG&A and R&D and patent costs in the aggregate will tend towards the low end of our guidance range of 10 to 15% year-over-year increase. Operating income was $53.3 million for the second quarter of 2022, translating into operating margin of 39%. This compares to $62.3 million in operating margin of 41% in the first quarter and $49.9 million in operating margin of 38% in the second quarter of 2021. Income tax rate was 24.5% for the second quarter of 2022, and for the year, we believe our tax rate will be approximately 22%. Net income for the second quarter of 2022 was $41.5 million, or 87 cents per diluted share. This compares the last quarter's $50 million, or $1.05 per diluted share, and the comparable year-over-year quarter of $40.5 million, or 85 cents per diluted share. We ended the quarter with approximately $834 million in cash, cash equivalents and investments, or $17.58 of cash per diluted share. Moving along to guidance, as Steve discussed, with the softening demand environment and continued macro uncertainty, we are revising our outlook for the year. We now expect 2022 revenues to be approximately $600 million, plus or minus $10 million. We now believe that the ratio of material to royalty licensing revenues will be in the ballpark of 1.3 to 1. The shift in revenue mix is a result of the deferred revenue recognition as customer long-term agreements reach the end of their term. And lastly, our board of directors approved a 30 cent quarterly dividend, which will be paid on September 30th, 2022. To stockholders of record as of the close of business, on September 16th, 2022. The dividend reflects our expected continued positive cash flow generation and commitment to return capital to our shareholders. With that, I will turn the call back to Steve.
spk03: Thanks, Sid. As we look to the OLED industry, the stage is being set for the market's next growth phase. While macroeconomic clouds of uncertainty are expected to weigh on the consumer demand landscape in the near term, with pending new OLED capacity announcements, an expanding list of panel manufacturers entering commercial medium and large area OLED production, and a broadening landscape of consumer OLED products, OLED momentum continues to build for strong growth in the coming years for the industry and for us. From discovering and opening new innovation pathways to broaden our portfolio of all the materials and technologies, to increasing our critical mass and growing our global footprint in Asia and Europe, we are further solidifying our leadership position, bolstering our value proposition and support to our customers while expanding our horizon of opportunities. I would like to thank each of our employees for their drive, desire, dedication, and heart. in elevating and shaping Universal Display's accomplishments and advancements. We are committed to being a leader in the OLED ecosystem, achieving superior long-term growth and delivering cutting-edge technologies and materials for the industry, for our customers, and for our shareholders. And with that, operator, let's start the Q&A.
spk01: Thank you, Mr. Abenson. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Brian Lee with Goldman Sachs. Please proceed.
spk09: Hey, guys. Good afternoon. Thanks for taking the questions. You know, sad to say these will be the last questions on a public call for my friends. But great legacy here. You will be sorely missed. Congrats on the retirement.
spk07: Thank you. Thank you very much, Brian.
spk09: I guess just a couple questions. I know you're going to get a ton around the guidance, so maybe just to start off big picture, can you kind of give us a bit of a breakdown of where you saw the orders and demand softening? Is it kind of between geos, more Korea, more China, and then on applications? Was it, you know, seem more smartphone specific or more TV or vice versa? And then how comfortable are you that you've sort of captured the downside risk as we move through the second half, i.e., you know, is this pretty conservative in terms of the order softening in which you reflected in guide or, you know, what are some of the puts and takes as to whether or not there could be even further downside risk?
spk07: Well, you know, without commenting on any particular customer, you know, we believe that the macroeconomic uncertainties and inflationary pressures are impacting consumer spending across the board. There's also been a lot of reporting that the lockdown in China may have impacted domestic sales. You know, when we do this, you know, we took into account our customer forecast, the slowing demand for the consumer electronics products and continued headwinds from the pandemic. You know, as you're well aware, many of the consumer electronic and part of the consumer electronic ecosystem, the uncertainty of the macro and rising inflationary pressures are really weighing on consumer spending and really affecting the demand side.
spk09: Yep, yep, fair enough. And then maybe just one more question and I'll pass it on. You know, there's a little bit more scrutiny around the competitive landscape here for the OLED materials segment. I think You know, the Samsung purchase of Synor in particular has gotten some investor focus, as well as some of the QLUX, I think, targeting of commercialization in the next couple of years. Anything noteworthy from your guys' vantage point around, you know, your status in red and green? And then I guess updated thoughts around blue as well. Thank you.
spk03: Hi, Brian. We believe the future of OLEDs will continue to sell phosphorus as they had for for more than a decade. And we believe we're continuing to make a lot of progress across the color spectrum. We have probably the largest team in the world working on these materials. And we're continuing to make excellent progress on blue and continue to be on track for the year-end meeting of preliminary specs and 2024 commercial introduction.
spk09: All right, fair enough. Thanks a lot, guys.
spk06: Thank you.
spk01: And our next question is from Krish Sankar with Cowan & Company. Please proceed.
spk04: Yeah, hi. Thanks for taking my question. And, Sid, as Brian mentioned, congrats on the retirement. You will definitely be missed, for sure, by analysts, investors, and your customers. So thank you for all that you've done for us.
spk07: Thank you very much. I appreciate those kind words.
spk04: It'll be missed by employees too. And employees too. I apologize.
spk07: My wife may not give you the same answer.
spk04: Sid, you might be on the board of directors, but I'm going to ask you this question and feel free to answer it because you might not be liable for this. I'm just joking. Hypothetically speaking, if revenues are down, If revenues are down next year, let's say 10% or so, how do you think about the operating leverage in the model and the earnings forward?
spk07: Well, you know, we think that, you know, it's still, you know, it's going to be a short-term blip. And, you know, we're, you know, operating, you know, we're a lean and mean company. We're actually, we're talking about, well, we talked about expenses being up 10 to 15%. you know, we're going to guide towards a lower end of that number. And the operating margins, I think, are going to continue, and we expect them to grow in the future. So, you know, it's 40% now, and as we've said in the past, we expect it to grow.
spk04: Got it. Got it. Fair enough. And then a follow-up is, you spoke about the $8.8 million catch-up revenue in the quarters. Can you give some color around it? Is it due to like certain amount of volume purchase agreement or what was that 8.8 million exactly about? Thank you very much.
spk07: It's, you know, it's the catch up based upon estimates for the year. And as we said that, you know, the, you know, we've made an adjustment in our guidance for the year by reducing our guidance to approximately 600 million from 625 to 650 million. So, you know, based upon the softness of demand in the quarter, we did make an adjustment to the forecast. And when you do that, you do have a cumulative catch-up that impacted.
spk04: Got it, got it. Thanks a lot, Sid, and thanks a lot, Steve. Thank you.
spk01: Our next question is from Sidney Ho with Deutsche Bank. Please proceed.
spk08: Thanks. Hey, Sid, let me add my congratulations on your retirement. It's been a pleasure working with you over the years. Thank you, Sid.
spk06: I like talking to Sid, so thank you.
spk08: I totally understand. Let me ask a question on utilization of customers. Clearly, OLED utilization has probably dropped in the second quarter, but may recover some in the second half. Given the lower utilization seen across the industry, have you seen any of your customers slowing down capacity additions? I understand that usually happens in the LCD market when utilization drops, so I'm curious whether that also applies to OLED.
spk07: Well, clearly, one of the reasons we reduced our forecast is the demand is getting reduced, but we talked about you know, installed capacity from the end of 21 to the end of 2023 to be approximately 20 to 25%. And right now, you know, we still think that that is the case. We are talking about 2024 for, you know, new capacity for IT products. But we have not seen anything of anybody scrapping their plans for expansion. I think in the long run, OLEDs are going to be the one. We all believe that.
spk08: Okay, that's fair. My follow-up question is on the OLED TV side of things. Samsung talked about their QD OLED surpassing the new targets and they expect increasing demand for QD displays. Can you remind us your revenue opportunity in the current version of QD OLED and maybe how that will change over time if they start adopting your phosphorous and blue And how should we think about your revenue opportunities in the white OLED versus QD OLED TV, assuming your emitter is fully adopted in both technologies?
spk07: Well, you know, while we can't speak for our customers, we are excited about Samsung entering the OLED TV market. As you can see, we believe that OLED TVs are spectacular products. and we are here to help and collaborate with our customers for all the displays from wearables to smartphones to IT to TVs, you know, and other markets including AR and VR. So we're very excited about them entering the TV market. And, you know, your question was, you know, when blue works, will it get adopted? That's something we really can't talk about. We can't talk about our customers. What we do know is our customers are very excited about getting a commercial blue.
spk08: Okay, thank you very much.
spk07: Thank you.
spk01: Our next question is from Jim Ricciuti with Needham and Company. Please proceed.
spk02: Hi. This is actually Chris Gringa on for Jim. And congrats on the announcement, Sid. Thank you. Sure. And just with the Shannon facility coming online in June, do you expect any impact on gross margin in the near term, whether it's a drag? Is it ramps? How are you thinking about that?
spk07: Well, you know, we believe that the Shannon facility is really going to help us as it expands our capacity by doubling our capacity And we think it's going to be a very cost-effective facility when it's up and running. There's obviously startup costs that you have to deal with, but I don't expect this to have any impact that would be noticeable.
spk02: Terrific. Thanks very much. Thank you.
spk01: As a reminder, just star 1 on your telephone keypad if you would like to ask a question. Our next question is from Martin Yang with Oppenheimer & Company. Please proceed.
spk05: Hi, thanks for taking my question. My question is more about your Chinese customers. It seems that their revenue contribution held up pretty well despite some very well communicated weakness in the underlying market. Can you maybe talk about what was driving that and do you expect maybe a higher decline from those customers in the second half, referring to customers in China?
spk07: Well, I think that customer safety, as we talked about, is those sales to Chinese customers have always been lumpy. And from one quarter to next, it's difficult to predict. I do think that there are issues, obviously, with the shuts down in China and things like that that impact it. But, I mean, overall, I think they're all working very hard to grow their OLED market and grow their share.
spk05: Thank you. The second question on gross margin, you know, historically it hasn't really affected by volume and it's mainly driven by mix. Is that still the case? If revenue slows down furthermore, do you expect any meaningful impact on your gross margin?
spk07: No, I think, you know, we expect, as we said, we expect our gross, we think that our gross margin is 65% to 70% for this year. We do think it's because of inflationary pressures. It's going to be towards the lower end.
spk05: Got it. Thank you, Sidney, and congratulations on the retirement.
spk06: Thank you very much.
spk01: Thank you. This concludes the question and answer session. I would like to turn the program back to Sid Roosevelt for his final closing remarks.
spk07: Well, I want to thank you all very much. And we appreciate your interest and support. And I just want to say it's been my pleasure working with all of you. So thank you all.
spk01: Thank you. This does conclude today's conference call. You may now disconnect.
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